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Breakfast Bites - Market muted on escalating tensions ahead of Options Expiry

Rise and shine everyone.

We are almost at the end of a tumultuous week closing out with the Monthly Options Expiration today. Goldman Sachs estimates $2.2T in notional expiring today.

There was strong sell-off in the markets yesterday after news broke about escalation of the war in the Middle East. Gold and Crude soared. Long-end Bond Yields and the US Dollar however, held up. This is not a great sign given that bonds and the dollar are usually assets that get a bid on the notion of “flight to safety”. There just doesn’t seem to be any demand for long bonds, and consequently dollars.

There could be a couple of reasons for this:

  • A continuation of the strong fiscal impulse (government spending) that has dominated for the better part of three years. The renewed discussion of further spending and reduced budget cuts are weighing on investors’ minds since it means more treasury issuances. Now, there’s another $100B on the table for aid to Ukraine and the Middle East, which means additional supply and perhaps more on the longer end.

  • Yesterday, Chair Powell talked about a rise in the neutral rate given stronger growth trends and a positive term premium which means people demand higher rates for longer tenors and higher risk. Tightening financial conditions is what’s driving the term premium according to him and that’s what the market is pricing in.

  • Chair Powell also kept the door open for further hikes should above-trend growth persist or labor conditions not ease further, i.e., if financials conditions begin to loosen again.

  • We also can’t totally ignore the lack of demand from Japan and China for longer term US Treasury.

Basically, the message is the shorter end will begin to stabilize and demand from income buyers will come in to push bond prices up and yields down. That’s a preview of what we saw during his speech yesterday with the Yield Curve steepening the most since, it inverted back in July 2022.

US Equity Futures continue to trend down this morning, with Bond Yields pulling back slightly. The 30Y still remains above 5% and the Yield Curve has inverted slightly to -0.21%. Gold and Oil are getting a bid yet again, alongside Bitcoin which crossed 30,000 today. The US Dollar remains muted.

Asia and Australia

  • Asia equities again traded lower across the region Friday. More steep losses in Hong Kong that is now trading on a key support level, Shanghai Composite slipped through the 3K mark to wipe out post reopening gains. South Korea again saw a sharp correction, Taiwan once again flat. Southeast Asia and India lower, steep losses in Thailand to send SET to three-year low, Jakarta a couple of points higher. Japan closed lower along with Australian markets.

  • China LPRs (Loan Prime Rates) were unchanged at 3.45% in 1y and 4.20% in 5y, remaining steady for two months in a row now. We’re not surprised given that cutting LPRs will mean putting pressure on the net interest margins at banks who are already dealing with the higher risk of default from property companies.

  • Instead of a rate cut, the PBoC made a record amount of short term cash injection in the economy’s financial system through reverse repurchase contracts, keeping funding costs low to support the economy. The amount was 733 billion Yuan (~$100B).

  • Japan core inflation eases, though marginally higher than expected: Core CPI rose 2.8% YoY in September, just above consensus 2.7% and follows 3.1% in the previous month. Marks the softest reading since August 2022. Contrary to other countries, Japan wants to see inflation take hold and remain stable before they can change monetary policy.

Europe, Middle East, Africa

  • European equity markets lower. Basic resources, travel/leisure, retail and insurance underperform, while healthcare, food/beverage and oil/gas relative outperformers.

  • German producer prices fell at the fastest rate since 1949 in September by 14.7% versus a year earlier, larger than forecast for 14.2% drop and extending the 12.6% decline in August. The main reason for the decline in September 2023 was energy prices, but there was also a drop in intermediate goods prices, while consumer and capital goods prices were higher.

  • UK retail sales fell 0.9% MoM in September versus consensus for a 0.2% drop and prior 0.4% gain, leaving YoY sales down 1%. The ONS noted that fall on the month was due to continuing cost of living pressures, alongside unseasonably warm weather reducing sales of autumn-wear clothing. This could further incentivize the BoE to hold rates steady in November.

The Americas

  • Existing home sales decline 2% to 3.96M in September. The median sale price was reported up 2.8% YoY. Limited inventory and higher mortgage rates continue to weigh on the US Housing Market. According to JPM, the underlying level of prices has declined over the past few months, but the weakening looks seasonal in nature.

  • BoFA’s Weekly flows: $2.1bn to bonds, $1.1bn from gold, $5.2bn from equities, $108.9bn from cash

Chart of the Day

Monthly Options Expiry Data from Goldman Sachs


(news taken from Reuters, FT, Bloomberg; Calendar from Newsquak, Trading Economics)


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